Investment commentary EQUINOX | SPRING 2020
SECTION TWO
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INVESTMENT REVIEW
COVID-19 – this time it’s different? Welcome to the investment review section of this edition of Equinox Mike Deverell
PARTNER & INVESTMENT MANAGER
US/China trade agreement
8000 7500 7000 6500 6000
UK General Election
Planned Brexit day
5500 5000 4500 Oct 2019
Nov 2019
Dec 2019
FTSE 100
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Summary There's been an awful lot of movement in markets over the past few weeks. Here, we explain our approach and outlook.
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Asset allocation Here we explain our asset allocation and approach.
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Welcome to the investment review section of our latest Equinox magazine. In this section, we look back at what has happened in the investment world since our last magazine back in October. With everything that has gone on in just the last month or so, that feels like a lifetime away. We have taken a different approach to Equinox this time, splitting our investment review section out from the main magazine. With everything moving so fast, this allows us to make sure the investment commentary is as up to date as possible. Whilst COVID-19 has of course had a significant impact, over the past six months we have also seen
Brexit day
what would otherwise have been very important developments. For example, the UK leaving the EU and the trade deal between the US and China. As usual, below is a timeline of market moving events plotted against the UK stock market. You’ll note that the period from 20 February is especially busy for obvious reasons! Over the coming pages, we’ll explain how markets have moved over recent times, how our strategy has evolved and what we think could happen in the future…
Initial Italy lockdown (Lombardy) COVID-19 hits markets
Fed emergency rate cuts
Fed unlimited QE Wuhan in China locked down due to virus
US fiscal stimulus agreed
Rest of Italy lockdown UK government financial support package Bank of England rate cuts
Jan 2020
Feb 2020
Mar 2020
Source: Thomas Reuters Datastream / Equilibrium Investment team. Data from 5 Oct 19 to 5 Apr 20.
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Sector analysis After a turbulent few months in markets, here we look at how our selected funds have performed compared to their relative sectors.
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Portfolio performance Here you can find a thorough breakdown of how each portfolio has performed in both the long and short term.
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Summary The members of our investment team have seen various crashes and bear markets in their careers. We vividly remember the financial crisis and the bursting of the tech bubble. One of the team was even managing money during the Black Monday crash of 1987! Unfortunately, stock market crashes happen from time to time. They are a simple fact of investing and we have to accept that risk is the price to pay for the long-term returns that equity investing can bring. Charlie Munger, business partner to the great Warren Buffett, put it in extremely blunt terms: “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” Whilst I would not put things in such a blunt fashion, I take his point! At the time of writing, the current bear market (defined as a fall of at least 20%) is nowhere near a 50% fall but is nonetheless a painful experience for investors. Despite short term losses, the returns over the past five years are well within the range of expected returns for a typical balanced portfolio based on historic risk and return analysis. In fact, our Balanced Portfolio has still outperformed the FTSE 100, the average managed fund and cash over five years as outlined on page 6. One of the biggest hits to performance has been from our defined returns products. However, as I outline on page 9, we think this also represents one of the biggest short-term opportunities. More positively, it is also pleasing to report that the vast majority of funds that we hold in portfolios (96%) have either equalled or
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outperformed their benchmarks over the period we have held them, many of them by a significant margin (see page 11 for details). We have also taken decisive actions during the recent crisis, many of which we hope will increase gains over the long term and some of which are designed to reduce losses in the short term. Page 7 outlines some of the sales we made in the portfolios, and some of the investments that we also managed to buy back at lower prices. We’d like to take this opportunity to thank our clients for the way they have reacted to this difficult period. We have done our best to communicate with you as openly and frequently as we can, and we really appreciate all your kind feedback. We hope all our clients, friends and acquaintances stay safe, and we look forward to seeing you all again when the world slowly returns to normal!
Economic and market impact Like many people, we were quite optimistic about both the global economy and the stock market coming into 2020. Here in the UK, we finally had some certainty around Brexit and there were signs that businesses were starting to invest in the UK again. The government promised fiscal spending on infrastructure and services. Globally, the so-called trade war between the US and China had hurt growth during 2019, particularly in the manufacturing sector. However, a trade agreement had been struck. Economic indicators and business surveys all pointed to a pickup in economic growth as we moved into January 2020. We were cautiously optimistic about stock market returns, favouring defined returns which are often a less volatile way of investing in equities. Then, COVID-19 changed everything. You don’t need us to tell you how serious an impact this virus has
had in terms of loss of life and the effect it has had on our way of life. You probably also don’t need us to tell you that this will have a very big impact on our economy. The big questions for investors are how deep will the recession be, and how long will it last? And, if we happened to know the answer to that, we then need to work out which companies will come out of this stronger and fitter and which won’t come out of it at all! We never pretend to have a crystal ball or to be able to predict the future. Unfortunately, we don’t know how long we’ll all be in lockdown, nor do we know what will happen when we’re out of lockdown. Frankly, I don’t even think governments know what their exit strategy is yet!
Back to the history books… So, how can we make investment decisions in this environment? One way we can make decisions is to look at past recessions and bear markets. There have been numerous recessions, crises and bear markets in history, so we have plenty of data we can analyse. Each crisis was different from the others and from the current situation, but that doesn’t mean we can’t learn some interesting lessons from the past. One main lesson is that buying in the middle of a bear market, which can seem like a foolish thing to do at the time, tends to lead to great results for patient investors who can wait long enough! In the short term, it may feel like a mistake and might even lead to an increase in losses. However, over the long term, buying stocks when they are cheap has historically led to superior results. One metric of value is the price/ earnings (PE) ratio. The PE ratio essentially tells us what multiple of earnings (profits) we have to pay to buy a share or a market. Chart one on the opposite page shows the relationship between PE and returns. Each dot on the chart shows a different five-year period in
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the UK stock market. The higher up the chart, the higher the return was over that period. Along the horizontal axis is what the PE on the market was at the start of that five years. I have circled in blue the periods when the PE was similar to what it is now. All of the dots in this circle are well above zero. This means that every time in the past that markets have been at current levels we have seen a positive return over five years. Most periods have seen greater than 10% pa, whilst there have been many at the 15% to 20% pa range. In the history of this data, we have only rarely seen the PE ratio drop below 10. Only in the Eurozone debt crisis, the financial crisis, and in the 1970s/early 80s have we seen the PE drop below 10.
This is historic data and the current situation is different from any other situation in the past. However, whilst history rarely repeats there are often echoes. Of course, you might rightly say that earnings are bound to fall given the current environment. However, the same was true in the financial crisis, for example, when it appeared our entire financial system was about to collapse. Things are always cheap for a reason. They are only cheap when we are scared about the future. All the other times that markets were this cheap, there were good reasons to worry.
The harder they fall‌? The financial crisis and the recession it triggered were very serious, but it took some time for
Chart one: Price/earnings vs annualised returns
the crisis to unfold. The current crisis is happening much more rapidly. Whilst the downturn will probably be even steeper than in 2008/09, we believe it is likely that the recovery will come much faster. Central banks have acted decisively to shore up financial markets in a way that took them nearly 18 months during the credit crunch. Governments have moved to guarantee wages, provide cheap loans and give support to businesses and individuals. Again, by looking at history, we find some reassurance that the faster the falls in markets, generally the faster the recovery. Table one shows various bear markets (defined as a 20% or more fall from peak). It shows how many months it took for the market to fall peak to trough, and then how many months it took to recover halfway and all the way back. The longest bear market was in the Great Depression which took 33 months to fall peak to trough. It then took a staggering 271 months to full recovery!
Source: Refinitiv / Equilibrium Investment Management
Meanwhile, the shortest was in 1987 (after Black Monday) where the market bottomed out after just 3.4 months and took 20 months to recover. The quickest recovery was in 1982 where the market fell over 20.7 months but then took less than three months to get back to the previous peak!
Table one: bear market peaks, troughs and recoveries Bear market
Months from peak to trough
Months from trough to 50% former peak
Months from trough to former peak
Ratio of fall to 50% recovery
Ratio of fall to 100% recovery
1932
33.3
56.9
271.6
1.7
8.2
1942
17.8
5.6
11.1
0.3
0.6
1962
6.5
5.4
14.5
0.8
2.2
1970
18.1
6.4
21.7
0.4
1.2
1974
21.0
7.4
70.5
0.4
3.4
1982
20.7
0.7
2.8
0.0
0.1
1987
3.4
10.7
20.0
3.1
5.9
2002
31.0
15.8
56.5
0.5
1.8
2009
17.2
9.7
49.3
0.6
2.9
Average
18.8
13.2
57.6
0.9
2.9 Source: Fundstrat Global Advisors, LLC
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The table also shows a ratio between the length of the fall and the length of the recovery. On average, markets have historically been halfway back to their previous peaks in about the same time as it took to fall peak to trough. On average they get back to peak in around three times as long as it took to fall.
Five-year returns
If (and it’s a very big if!) the recent low point for the FTSE 100 of 4,993 was the bottom, then it took just over 10 weeks to fall peak (17 January) to trough (23 March). Judging from table one, it would not be outside the realms of possibility to be back to those peak levels by the end of the year.
As we know, some years will be better than others. Most 12-month periods are positive, but some years, like the last one, will see negative returns. Even some five-year periods can be much better or worse than others. Our secondary objective is therefore that over each five-year period, we will try not to lose money.
That is not a prediction, merely an observation based on historic data. If I were a betting man, I would say it more likely to take longer than that and also that we may not have yet seen the bottom. However, it just shows that markets do recover from such shocks and, usually, the steeper the fall the sharper the recovery.
Unfortunately, the last five years has now officially become the worst five-year period in the history of our Balanced Portfolio, for which we have data going back to the beginning of 2008.
Over the very long term (ten years or more), the target for our Balanced Portfolio is to beat inflation by around 5% per annum on average. Based on inflation in line with the Bank of England’s 2% target, we therefore aim for around 7% per annum on average.
The five-year return up to 31 March 2020 was 1.33% per annum after all investment management, financial planning and platform fees. Very disappointing.
Table two: total and annualised return over the last five years to 31 March 2020 Bear market
Total return %
Annualised return %
Equilibrium Balanced Portfolio
6.82
1.33
UT Mixed Investment 20%-60% Shares
6.08
1.19
FTSE All-Share Index
2.89
0.57
Cash (Bank of England base rate)
2.60
0.51
Source: FE Analytics / Equilibrium Investment Management. Equilibrium portfolio return shown after a total Equilibrium fee of 1% pa plus platform charges. No platform or advice fees are assumed in the returns of the other indicators.
However, whilst we are never happy when returns are low, it is worth pointing out that this return is still better than some of the main things we benchmark ourselves against. Table two shows the total returns of our Balanced Portfolio over five years (after all charges) compared to the average mixed investment fund that has between 20% and 60% invested in shares (a similar range of equities to the Balanced Portfolio). It also shows the return of the FTSE All-Share index of UK equities as well as the return on cash, using the Bank of England base rate as a proxy. Despite the very disappointing five-year returns, the Balanced Portfolio has returned more than the stock market, more than the averaged mixed investment fund and more than cash. It is also worth pointing out that this return is within the range of expectations for a balanced portfolio based on long-term asset class returns. We use historic risk and return data on all the main asset classes to design and refine our Balanced Portfolio, combining a mix of assets that we feel give us the best chance of achieving both the longand short-term objectives. This data goes back to 1990 for all the main asset classes (although our data for some asset classes goes back much longer).
Chart two: EQ Balanced Strategic Portfolio vs FTSE All-Share rolling five-year returns*
EQ balanced strategic
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FTSE All share
*Past performance is never a guide to future returns
Source: FE Analytics / Equilibrium Investment Management 1 Jan 1990 to 31 March 2020.
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as fears grew that we were entering a sharp economic downturn, investors started to worry that the credit worthiness of many companies would come under pressure� Chart two looks at the rolling five-year returns of the strategic balanced asset allocation (the asset mix we would choose if all asset classes were fairly priced) assuming each asset class achieved just the index returns (therefore assuming no active management at all). It analyses every five-year period beginning each month since 1990. The chart shows how frequently the return has been within each range over all the different five-year periods since 1990. The pink bars are the Balanced Portfolio and the blue bars show the same thing for the FTSE All-Share for comparison. The Balanced Portfolio has a much narrower range of outcomes than the FTSE All-Share index. We’re comparing the portfolio against the FTSE in order to illustrate how much more consistent the returns tend to be than a pure stock market investment. The worst five years we can find in our data set for the Balanced Portfolio is 0.57% per annum, whereas the worst five years for the stock market was -6.6% per annum. Returns for the balanced strategic allocation have been in the 1% to 2% pa range, in line with the most recent period, around 8% of the time. That is based on our historic modelling rather than the real
portfolio which only has returns going back to 2008.
in price. Corporate bonds held relatively steady.
Table three shows the best, worst and average five-year returns for the real Balanced Portfolio from 2008 onwards. This time we have compared returns to the mixed investment 20%-60% shares sector.
Our short-dated fixed interest, which invests in bonds that have only a short time to maturity, continued to tick along as usual providing steady returns ahead of cash. Diversification worked as it is supposed to do.
The average five years has seen a return of 7% pa, bang in line with the long-term target. The best five years saw 11.2% pa and the worst is the most recent period at 1.33% pa.
Then, as we moved into March, things started to change. As stock market falls accelerated, leveraged investors suddenly realised they needed to close out their positions and repay their borrowing before they were broke. They needed liquidity fast, so they sold whatever they could.
The best, worst and average five-year figures have all been better than the mixed investment 20-60% shares sector. In fact, so far, our Balanced Portfolio has outperformed the sector in every single five-year period. The recent sell off in markets has hurt returns, but our historic data analysis takes into account past periods where returns have been equally as poor. Our long-term return targets remain appropriate in our view.
Sale and buyback When stock markets first started to sell off in a major fashion in February, the non-equity asset classes initially held up well. Government bonds such as gilts, did what they normally do when stock markets fall and increased
Table three: best, worst and average five-year returns for the EQ Balanced Portfolio From 2008
EQ Balanced fund (1% fee)
UT Mixed Investment 20-60%
Best
11.21
9.10
Worst
1.33
1.18
Average
7.02
5.55
In addition, as fears grew that we were entering a sharp economic downturn, investors started to worry that the creditworthiness of many companies would come under pressure. Bonds then began to fall alongside equities. All the main asset classes became more correlated, which is a nightmare for those trying to build diverse investment portfolios. Like many investors, we then decided that we should take extra steps to increase liquidity. We wanted to make sure that, if there was a risk of further losses in the equities we hold in portfolios, that the non-equity assets we held were more secure. We therefore decided to sell down a large proportion of our fixed interest and other more defensive assets such as infrastructure and property. This proved the right thing to do, as some of the assets we sold fell sharply after we sold them.
Source: FE Analytics / Equilibrium Investment Management 1 Jan 2008 to 31 March 2020
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Table four shows some of the major sales we made in portfolios and the returns of those investments since sold. Every single one of them is down in price since the date of sale. As of 3 April, this meant cash levels in our Cautious Portfolio were around 20%, roughly 12% of a Balanced Portfolio, and more than 7% of Adventurous. We have put around a quarter of this cash into dollars and euros in order to diversify our currency exposure against the risk of a fall in sterling. You may notice from the table that we have subsequently bought back a couple of the funds. Both are Royal London funds which invest mainly in so-called high yield bonds. These bonds are issued by companies which are deemed less secure by credit ratings and so they need to pay higher levels of interest. This means that they offer attractive potential returns, but there is a higher risk of defaults in an economic downturn. What these funds have in common is that we believe they are a slightly lower risk way of investing in these higher yielding bonds. In the case of the short duration fund, the risk is reduced partly because there is a short time to maturity for many of the bonds.
In the case of the extra yield fund, the manager specialises in finding bonds with a low credit rating (often no rating at all!) but which are secured on some sort of assets. We bought these funds back at around 8.4% and 10.9% below where we sold them. This means that their yields, already pretty high to start with, are now substantially higher. Given that interest rates are close to zero, we think this will be attractive to many investors and that the yields now more than compensate for the extra risk we are taking. These will not be the only funds that we sold that we will buy back. In the vast majority of cases, we think these are still funds that are good long-term investments, but there are short-term challenges. We will therefore be cautiously reinvesting this cash over the next weeks and months, but only where we believe stability has returned to that asset class.
Defined returns The worst performing asset class in our portfolio has not in fact been our traditional equity holdings which have performed well in relative terms (see page 17 for details of individual fund performance). The hardest hit asset has been our defined returns products.
Normally, these fixed term products are seen as a slightly lower risk way of investing in stock markets. They have some in-built capital protection and a structure that, whilst it caps the total return in a rising market, increases the likelihood of getting that return. For instance, our most recent product was struck on 11 March when the FTSE 100 was at the 6,000 level and the S&P 500 at 2,808. If these markets are at or above those levels on 11 March 2021, the product kicks out and pays us a return of 20%. The UK market therefore only needs to be at or above 6,000 (and the S&P back above it's starting level) and we get a significant return. An index tracking fund would need the market to be at around the 6,900 mark to provide the same level of return (assuming a 5% dividend yield). If the market has gone down over that first year, the product simply rolls onto the second anniversary. If the markets are back above their starting point on that date, the product then pays out two lots of 20% (40%). If not, they roll onto year three and so on.
There are six chances to get this return. If it takes six years for the FTSE to get back above 6,000 (and the S&P back above it's starting level) but it just manages it in Table four: Returns of products sold from portfolios since sale
Major sale date*
Date bought back (if applicable)
Return since sale (to buyback date or to 3 April if n/a)
Royal London Short Duration High Yield
28-Feb
27-Mar
-8.41
Semper MBS Total Return
09-Mar
n/a
-26.89
L&G Sterling Short Dated Bond
28-Feb
n/a
-3.74
TwentyFour Absolute Credit
28-Feb
n/a
-3.04
Royal London Sterling Extra Yield
09-Mar
02-Apr
-10.89
TwentyFour Dynamic Bond
13-Mar
n/a
-5.86
13-Mar
n/a
-4.06
13-Mar
n/a
-0.06
Fund sold Short dated fixed interest
Fixed interest
Alternative equity Foresight UK Infrastructure Income Property Time Commercial Long Income
*Sales were placed over a number of dates. This shows the date of sale in thebalanced portfolio based on the largest or earliest significant trade. Source for returns: FE Analytics.
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March 2026, we could get six lots of 20% or a 120% return. However, if at that point the market is still below 6,000, then we get back our original investment, unless one or more of the indices is more than 40% down over the period. If that happens, we then get a return in line with the worst performing index, so if that is down 45% we lose 45%. To date, the markets have never yet fallen by as much as 40% over any six-year period. The products are provided by investment banks, and so there is also credit risk. Goldman Sachs is the counterparty for the above product, and if they were to go bust, we could lose our capital. The products are daily traded, so we can buy or sell at any time and we don’t have to hold until maturity or kickout. These secondary market prices of course go up and down with the market but, because of the structure of the product, they usually tend to go down less than an index tracking fund when markets falls. In the recent sell-off, these products went down by much more than the market. We have another product with Morgan Stanley, struck on 6 March 2019 when the FTSE 100 was at 7,196 and the S&P 500 at 2,771.
When the FTSE closed at 4,993 on 23 March, this product was trading at 61p per share. That made it 39% below the issue price of £1 per share even though the market was only down 30% from that level. To us, we felt this was a crazy price. The capital protection element means that this product will repay at least £1 per share on its sixth anniversary provided the market is above 4,318 and the S&P 500 has not dropped more than 40% over the term. This means that, as long as the market return from 23 March 2020 to 6 March 2025 is better than a 13.5% loss, the product will gain 63% just by getting back to £1. That ignores the potential coupons of 12.9% which will be received on top of this if the market gets back above 7,196 at one of the anniversary dates. Naturally, as bargain hunters, we wanted to buy in at that price. However, when we enquired about purchasing, we were quoted a price of around 72p, rather than the 61p we would receive if we sold! That is a huge spread compared to the usual 1% and is a great illustration of what was going on in the market at the time and how illiquid things had become. Morgan Stanley valued the bond at 72p, but if we wanted to sell it, we would only get 61p – a big premium to pay for liquidity!
These very low prices of course had a big impact on our returns. However, experiences such as that outlined previously convinced us that in many ways these prices were artificially low and did not reflect their true value. Luckily, we did not need the liquidity and had the ability to be patient and hold our nerve with the products. Whilst we did not top up the Morgan Stanley product at the quoted price, we have switched more money into defined returns. Having gone down more than the market and offering greater potential upside in many cases should markets recover, we switched some of our index tracking fund holdings into defined returns. Chart three shows the performance of a fund of defined returns that we also use, called the Atlantic House Fund Management (AHFM) Defined Returns Fund compared to the FTSE 100. This illustrates how defined returns initially fell less than the market but then quickly fell below it during early March. Marked on this chart are the dates where we bought into Atlantic House and where we sold a FTSE 100 tracker. We will continue to make small tweaks such as this to our strategy, swapping in funds which we believe have greater potential upside where appropriate.
Chart three: AHFM Defined Returns vs FTSE 100
A - AHFM - Defined Returns B (-19.30%) B - FTSE 100 (-27.50%)
Source: FE Analytics 31 December 2019 to 3 April 2020. Trade dates show major trades made within the IFSL Equilibrium Balanced Portfolio
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Asset allocation Chart four shows how the asset allocation of our Balanced Portfolio has changed since launch in 2008. For example, the pink area represents how much equity there has been in the portfolios over this time period. Where there is more pink in the chart, this means we were holding more equity at the time. The blue line shows what the FTSE 100 level was at the time. What you can see is that generally, as markets go up we reduce the amount in equity, but as markets go down we increase it. As the market began to drop earlier this year, we reacted by buying equity as we normally do when we get a short-term sell off. Of course, this sell off turned out to be sharper and deeper than any of the recent corrections we’ve seen. As outlined earlier, buying at relative lows can help long-term returns but, of course, can make short-term losses worse. We have therefore tweaked our equity strategy as we have gone
buying at relative lows can help long-term returns but can make short-term losses worse� along as the extent of the virus impact became clearer. For example, having bought equity at a FTSE 100 level of around 6,750, we then changed our minds, having received new information and sold again in some portfolios at around 6,800. We then set a new buy level at around the 6,500 mark, which again proved too early.
We also switched some equity into defined returns which we think can capture more of the gains if and when we see a recovery. It is important to note the effects of compounding. For example, if markets drop by 30%, then recovering back to the previous peak requires a 42% gain. What this means is that if you are able to rebalance a portfolio during a bear market, moving some money out of lower risk assets like cash and into equities at a low point, you can come out of a crisis in a better position than where you went into it.
We topped up equity again on some portfolios at around 5,800. Once more, when markets dropped further to around the 5,000 level, we reviewed this strategy, and sold some of this again as markets recovered back to around the 5,700 level. This means we can buy back if we drop back closer to 5,000 again. Chart four: EQ Balanced Portfolio asset allocation since launch
Cash
Short dated
Alternative equity
10
Fixed interest Equity
Property
Defined returns Source: FE Analytics / Equilibrium Investment Management
EQUINOX | SECTOR PERFORMANCE & ANALYSIS
Sector perfomance & analysis Whilst many asset classes have seen very poor returns, our fund selection has generally been extremely positive in relative terms. Many investors like to hold index tracking funds, and we do indeed hold several in portfolios. However, we also invest in actively managed funds where we believe they offer superior returns and good value for money. We track the performance of the funds we hold on a monthly basis compared to a suitable benchmark or sector average. We look over multiple time periods, but particularly important is how the fund has performed over the entire time we have held it in portfolios. At the end of March, there were 29 collective investment funds in our various portfolios. Of those, 20 of them (69%) had outperformed their benchmark by more than 25%
over the period held in portfolios. A further five had outperformed by 10% or more (17%).
Table six shows returns of the individual funds and our UK portfolios over various time periods. The UK Conservative Equity Portfolio has outperformed the equity income sector average over all time periods shown.
Table five shows what percentage of our funds fall into each category. An amber fund is one where returns are within 10% of benchmark. As of end of March, 93% of the funds held in portfolios had an amber or better rating.
The best performer was the Miton UK Multi Cap Income, which fell a lot less than the market over the past few months and remains in positive territory over five years, even though the average fund is negative over that time frame.
UK equities UK stocks, like most markets around the world, have seen a very poor period recently. However, our individual funds generally did very well in relative terms.
In contrast, our UK Dynamic Equity Portfolio is designed to be more aggressive and, whilst we’d expect the funds to outperform in a rising market, they can often underperform in a falling market.
Our UK Conservative Equity Portfolio is designed to be a lower volatility way of accessing stock markets, which we’d expect to fall less than the market in a downturn. The funds are largely equity income funds and so the benchmark for this portfolio is the equity income sector.
This portfolio has indeed underperformed marginally over six months, although Lindsell Train and Marlborough have actually fallen by less than the market.
Table five: fund returns and categories Fund return > 125% benchmark return
69%
Fund return > 110% benchmark return
17%
90% < Fund return < 110% benchmark return
7%
Fund return < 90% benchmark return
3%
Fund return < 75% benchmark return
3%
Source: : FE Analytics / Equilibrium Investment Management. Various dates up to 31 March 2020.
However, over longer time periods (one year or more) we have seen consistent outperformance. The 19.1% return over five years is particularly pleasing, given the average fund has gone down more than 6% over the same time. Table six: UK equity fund performance
6 months %
1 year %
3 years %
5 years %
Rathbone Income Fund
-22.97
-23.28
Royal London UK Equity Income M Acc
-24.41
-24.71
-17.53
-4.08
LF Miton UK Multi Cap Income B Inst Inc
-14.78
-15.48
-9.70
9.28
Portfolio : Equilibrium UK Conservative Equity 01/10/2018
-20.72
-21.15
-16.84
-2.91
Sector : UT UK Equity Income TR in GB
-23.41
-25.18
-20.99
-11.08
Not in portfolios
LF Miton UK Value Opportunities B Inst Inc
-26.62
-23.18
-19.47
2.60
Lindsell Train LF Lindsell Train UK Equity
-18.57
-11.43
8.95
32.71
Marlborough Special Situations
-21.45
-20.68
-12.92
23.11
MI Chelverton UK Equity Growth
Not in portfolios
Polar Capital UK Value Opportunities
Not in portfolios
Portfolio : Equilibrium UK Dynamic Portfolio 01/10/2018
-23.65
-20.55
-10.55
19.11
Sector : UT UK All Companies
-23.13
-23.73
-17.70
-6.14
Sourcw: FE Analytics to 3 April 2020. Numbers are in green where they are ahead of the benchmark shown.
11
EQUINOX | SECTOR PERFORMANCE & ANALYSIS
Overseas equities Our overseas equity portfolios have outperformed their benchmarks, driven by a combination of good individual fund selection as well as by some positive equity allocation calls. Our Global Established Portfolio of funds from North America, Europe and Japan, has outperformed its benchmark over every time period as shown in table seven. Over the last few months, this outperformance has partly been driven by our overweight position in Japan and underweight positions in the US and Europe. Japan has generally dropped by less than other regions in this period, with the Lindsell Train Japanese fund doing especially well. Whilst the European market has performed poorly, our European funds have done significantly better than the average fund. Meanwhile in the US, we continue to simply hold an index tracking fund which has outperformed the average fund over three and five years. Our Global Speculative Portfolio of emerging market funds has also outperformed its benchmark over all time periods. This is mainly driven by regional allocation, with our preference for China and other parts of Asia continuing to pay off.
At 31.22% up over three years and 61.56% over five years, the Invesco China fund has provided some excellent long-term returns even despite the recent drops.
Alternative equity Our Alternative Equity Portfolio is designed to provide long-term returns roughly in line with what we would expect from stock markets, but with less volatility. Weâ&#x20AC;&#x2122;d generally expect the portfolio to fall less when markets drop and gain less when they rise. Ideally, we want to find funds that have low levels of correlations with the main asset classes like equity and fixed interest. The portfolio holds strategies such as infrastructure funds, so-called absolute return funds, and long/short funds (which can make money from stocks falling as well as rising). Over five years, the portfolio has just about achieved a positive return whilst the UK stock market has dropped, so in one sense has achieved its objective as can be seen in chart five. However, the recent falls have been disappointing. That has been driven in part by an increase in correlations across asset classes. Many of the funds try to combine different positions, both long and short, to make returns in most market environments. In
recent times, these hedges and positions that normally diversify portfolios have not worked as well as normal. Very recently, there have been some signs that correlations are decreasing again which should help the portfolioâ&#x20AC;&#x2122;s returns going forward.
Fixed interest Our Fixed Interest Portfolio is benchmarked against the corporate bond sector, although our portfolio can hold both corporate and government bonds. Over five years, the portfolio has returned 20.08%, relative to the average corporate bond fund which has returned 14.58%. Despite the long-term outperformance, bond funds fell sharply in March despite central bank rate cuts and announcements of quantitative easing, which is usually supportive for bonds. Our portfolio generally fell less than the average fund. This is partly due to fund selection but also because, in early March, we sold those funds we thought most at risk of further falls whilst increasing exposure to government bonds. This proved the right thing to do, and so we are now actively looking for opportunities to buy back some
Table seven: Global Equity Portfolio performance 6 months %
1 year %
Baillie Gifford Japanese B Inc
-19.79
-12.51
Lindsell Train Japanese Equity B Sterling Quoted GBP
-4.34
3 years %
5 years %
-0.38
34.71
Not in portfolios
Sector : UT Japan
-16.60
-9.30
-3.92
23.41
BlackRock European Dynamic FD Inc**
-13.28
-7.69
6.56
32.28
LF Miton European Opportunities
-6.06
1.94
Sector : UT Europe Excluding UK
-16.50
-12.87
Not in portfolios -7.83
10.97
Vanguard US Equity Index Inc
-14.22
-7.76
9.20
51.09
Sector : UT North America
-13.77
-7.29
8.65
46.49
Portfolio : Equilibrium Global Established Portfolio 01/10/2018
-12.08
-5.73
6.42
40.07
Portfolio : Glbl Est Benchmark
-14.81
-9.33
2.02
31.41
GS India Equity Portfolio I GBP
-28.55
-28.94
Hermes Global Emerging Markets SMID Equity
-22.00
Invesco China Equity (UK)
-0.84
Not in portfolios Not in portfolios
0.95
31.22
61.56
Schroder Asian Alpha Plus Z Inc
-9.54
-12.66
7.26
38.85
Portfolio : Equilibrium Global Speculative Portfolio 01/10/2018
-13.27
-14.32
5.82
31.64
Sector : UT Global Emerging Markets
-18.09
-16.55
-8.18
11.88
Sourcw: FE Analytics to 3 April 2020. Numbers are in green where they are ahead of the benchmark shown.
12
EQUINOX | SECTOR PERFORMANCE & ANALYSIS
of the funds at lower levels that mean they now offer higher levels of yield.
such as supermarkets, on long leases which tend to be linked to inflation.
Property
As you can see from chart six, which shows five-year returns, this meant our property portfolio saw positive returns last year even though the benchmark (a composite of other bricks and mortar property funds) lost money.
Property funds have had several significant challenges over the past few years. Firstly, around the Brexit referendum they saw serious outflows meaning that many funds had to gate and stop investors from taking their money out. We acted quickly as soon as we knew the referendum result and sold prior to the funds being gated. Although we bought back in later in the year, from the referendum onwards we have only held a small amount of property in portfolios. Since December 2019 we have held just one property fund, which is the Time Commercial Long Income fund. This invests mainly in relatively defensive properties,
In recent times, many property funds have again been forced to gate, this time because the valuers are not sure what the underlying buildings are worth anymore! With the property market essentially being shut down due to the virus, there have been few transactions to provide evidence to back up valuations. It is possible that our economy could look vastly different after this crisis as the move to online, already hitting retail property, might also reduce demand for office space in the long term.
Chart five: Alternative Equity vs FTSE All-Share
A - Equilibrium Alternative equity (0.29%) B - FTSE All Share (-3.17%)
Source: FE Analytics / Equilibrium Investment Management. 03/04/2015 – 03/04/2020
Chart six: Equilibrium Property Portfolio vs composite property benchmark
A - Equilibrium Property portfolio (24.99%) B - Composite property benchmark (9.66%)
Prior to this mass gating, we had sold down exposure, even to the Time Fund, to around 1% of portfolios on average. Unfortunately, we weren’t able to get all of the money out before the fund was itself forced to gate but, given the nature of the assets it holds and the liquidity elsewhere in the portfolio, this should not cause any major issues.
AIM The EQ AIM Portfolio invests in stocks listed on the Alternative Investment Market (AIM) which we believe qualify for Business Property Relief (BPR). The primary purpose of the portfolio is for inheritance tax planning. The total return for the FTSE AIM Index for the last 12 months to 3 April has been -27.4% and for the EQ AIM Portfolio was -16.5%. Since the virus began to spread, we have undertaken continuous reviews of the progress of the investee companies. Some companies are more vulnerable than others. For example, there are healthcare and telecommunications companies that are still open for business whilst at the other end of the spectrum companies like Dart Group and Young & Co. run airlines and pub chains which are currently closed. Nobody knows the duration or severity of the virus’s economic impact. Our reviews have therefore focused on levels of indebtedness to see how much headroom each individual balance sheet has to survive through the quarantine period. So far, we do not see any immediate red flags. We believe the core portfolio criteria of cash-generative, large and established business models will put the investee companies in relatively good stead to remain credit-worthy for banks to support in the short term. However, we remain vigilant and will clearly take action where necessary to protect clients’ capital.
Source: FE Analytics / Equilibrium Investment Management. 03/04/2015 – 03/04/2020
13
EQUINOX | STATISTICS
Model portfolio returns Below is the performance of our Cautious Portfolio, Balanced Portfolio and Adventurous Portfolio. Strategic asset allocation 2% 29%
35%
11% 23%
2% 27%
38% 11%
22%
2% 10% 55%
22% 11%
Equity
Cautious Portfolio
6 months %
1 year %
3 years %
5 years %
Since launch* %
Cautious Portfolio
-11.53
-10.24
-4.92
4.71
60.05
Mixed Asset 20-60% Shares Sector
-11.32
-8.87
-4.64
4.99
41.62
6 months %
1 year %
3 years %
5 years %
Since launch* %
Balanced Portfolio
-13.06
-11.70
-5.71
5.77
62.46
Mixed Asset 20-60% Shares Sector
-11.32
-8.87
-4.64
4.99
41.62
Adventurous Portfolio
6 months %
1 year %
3 years %
5 years %
Since launch* %
Adventurous Portfolio
-15.19
-13.63
-6.33
9.38
66.13
Mixed Asset 20-60% Shares Sector
-11.32
-8.87
-4.64
4.99
41.62
Balanced Portfolio
Cash
Fixed interest
Property
Alternative Equity
We also show returns compared to the Asset Risk Consultants indices made up of other discretionary managersâ&#x20AC;&#x2122; portfolio returns. These are shown in the table below and are given to 1 April 2020 as ARC indices are published on a monthly basis: 6 months %
1 year %
3 years %
Cautious Portfolio
-11.96
-9.04
-4.01
5.73
61.26
ARC Sterling Balanced PCI
-9.17
-4.96
-1.35
7.68
45.04
-13.34
-10.13
-4.56
7.14
64.10
-9.17
-4.96
-1.35
7.68
45.04
-15.34
-11.53
-4.72
11.33
68.52
-9.17
-4.96
-1.35
7.68
45.04
Model Portfolio
Balanced Portfolio ARC Sterling Balanced PCI Adventurous Portfolio ARC Sterling Balanced PCI
* Launch date 1 January 2008. All data to 3 April 2020. Figures are highlighted in green where they are in excess of the relevant sector.
14
5 years %
Since launch* %
EQUINOX | STATISTICS
Sector portfolio returns 6 months %
1 year %
3 years %
5 years %
Since launch* %
UK Conservative Equity
-20.75
-21.43
-17.06
-2.91
49.09
UT UK Equity Income Sector
-23.45
-25.45
-21.12
-11.08
34.08
UK Dynamic
-23.85
-21.22
-11.20
19.11
79.02
UT UK Equity All Companies Sector
-23.27
-24.15
-17.86
-6.15
38.39
Global Established
-12.76
-6.67
6.58
40.07
138.76
-15.17
-10.37
1.97
31.40
118.72
-15.66
-15.32
-5.10
61.68
217.91
-23.24
-27.53
-26.27
-1.24
-27.24
Global Speculative
-13.10
-14.97
4.44
31.64
58.65
UT Global Emerging Mkts Sector
-18.22
-17.45
-8.95
11.87
35.06
Equilibrium Balanced Equity Mix
-17.10
-15.03
-4.97
19.74
79.69
Balanced Equity Benchmark ****
-19.19
-17.51
-9.26
9.51
64.36
Equilibrium Adventurous Equity Mix
-16.49
-14.12
-2.09
23.92
83.66
Adventurous Equity Benchmark ****
-18.73
-16.70
-7.90
12.17
65.19
Equilibrium Alternative Equity
-12.80
-13.01
-7.08
0.03
53.93
UT Mixed Asset 20-60% Shares
-11.32
-8.87
-4.64
4.99
41.62
Equilibrium Fixed Interest Portfolio
-1.74
4.07
10.59
20.08
86.97
UT Sterling Corp Bond Sector
-3.62
2.10
6.33
14.58
69.06
1.78
2.96
10.41
24.99
77.93
-2.81
-2.71
5.22
9.66
58.63
Equity Portfolios
Global Established Benchmark
**
Equilibrium AIM FTSE AIM All Share
***
Equilibrium Property Portfolio Composite Property Benchmark
* ** *** **** *****
*****
Launch date 1 January 2008 except Property Portfolio 1 July 2009. Global Established Benchmark is 40% UT North America, 40% UT Europe Ex UK, 20% Japan. Performance data prior to 17 March 2015 (launch date) is calculated using the backtested model portfolio. Cautious, Balanced and Adventurous Equity benchmarks are an appropriate composite of the benchmark for each component of that equity mix. Composite Property Benchmark is an equal weighting of all eligible funds in the UT Property Sector. Property portfolio switched to cash 15 June 2012 to 11 April 2013 as we did not hold property funds in this period.
Figures are highlighted in green where they are in excess of the relevant â&#x20AC;&#x2DC;Mixed Assetâ&#x20AC;&#x2122; sector.
15
EQUINOX | STATISTICS
Market returns Equity Markets
6 Months %
1 Year %
3 Years %
5 Years %
FTSE 100 Index (UK)
-22.16
-23.77
-15.70
-2.95
FTSE All Share Index (UK)
-22.81
-24.03
-16.18
-3.17
FTSE 250 Index (UK Mid Cap)
-26.36
-25.68
-19.03
-6.20
MSCI Europe Ex UK Index
-16.15
-12.31
-5.73
10.71
S&P 500 Index (USA)
-12.87
-5.71
11.99
56.49
Topix (Japan)
-14.94
-7.85
-3.42
24.49
MSCI Emerging Markets Index
-14.63
-15.26
-5.80
13.94
IBOXX Sterling Corporate Bond Index
-4.14
1.66
6.76
18.86
UT Sterling Corporate Bond Sector
-3.62
1.80
6.61
14.58
FTSE British Government Allstocks (Gilt) Index
2.76
11.19
14.46
26.86
UT Gilt Sector
2.39
11.38
15.13
25.82
-12.36
-9.66
-3.90
4.41
-2.80
-2.68
5.25
9.66
Bank of England Base Rate
0.09
1.50
5.95
8.93
UK Retail Price
0.34
0.71
1.74
2.59
Fixed Interest
UT Sterling High Yield Sector Property Composite Property Benchmark* Other Measures
* Property benchmark is a composite of all eligible funds in the UT Property sector.
Risk warnings and notes Past performance is never a guide to future performance. Investments will fall as well as rise. Any performance targets shown are what we believe are realistic long-term returns. They are never guaranteed.
Unless stated otherwise:
•
• All performance statistics are from Financial Express Analytics on a bid-bid basis with income reinvested.
• Individual sector portfolios are shown with no charges taken off or fund manager discounts applied.
• All performance data is to 3 April 2020.
For details of your own portfolio performance, please refer to your half-yearly statement from the wrap platform in which you are invested. We will also provide personalised performance information at your regular reviews.
None of the information in this document constitutes a recommendation. Please contact your adviser before taking any action.
• Model portfolio performance is stated after a 0.75% financial planning fee, 0.25% investment management fee and platform cost of 0.2% per annum.
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• Your own performance may vary from the model due to dividend pay dates, transaction dates, contributions and withdrawals. Actual performance may also differ slightly due to constraints over how we can reflect fees and discounts from fund managers. These are assumed not to change over the whole investment period. In reality, discount levels change as we change the funds in which we invest.
EQUINOX | STATISTICS
Ideal funds Portfolio
Fund Name
Initial Charge %
Annual Management Charge %
Ongoing Charges Figure %
Liquidity
Cash
0.00
0.00
0.00
Royal London Short Duration High Yield
0.00
0.50
0.63
Allianz Strategic Bond
0.00
0.60
0.79
Jupiter Strategic Bond
0.00
0.50
0.73
Nomura Global Dynamic Bond
0.00
0.60
0.75
Royal London Extra Yield Bond
0.00
0.75
0.83
Time Commercial Long Income
0.00
0.98
1.29
Carmignac Long Short European Equity
0.00
0.85
1.22
Foresight UK Infrastructure Income
0.00
0.65
0.65
H2O Multi-returns
0.00
1.00
1.00
Lazard Global Listed Infrastructure
0.00
0.85
1.03
Mygale Event Driven
0.00
1.25
1.50
Polar Capital UK Absolute equity
0.00
1.00
1.17
Short Dated Fixed Interest
Fixed Interest
Property
Alternative Equity
Defined Returns UK Conservative Equity Equity UK All Companies Equity
UK Dynamic Equity
Global Established Equity
Global Speculative Equity
Direct Defined Returns
0.00
0.00
0.00
Atlantic House Defined Returns
0.00
0.55
0.78
Miton UK Multi Cap Income
0.00
0.75
0.82
Rathbones Income
0.00
0.75
0.79
Royal London UK Equity Income
0.00
0.62
0.68
iShares FTSE 100 ETF Vanguard FTSE 100 ETF Chelverton UK Growth
0.00
0.75
0.87
Lindsell Train UK Equity
0.00
0.65
0.75
Miton UK Value Opportunities
0.00
0.75
0.83
Polar Capital UK Value Opportunities
0.00
0.75
0.86
Baillie Gifford Japanese Co.
0.00
0.60
0.63
BlackRock European Dynamic
0.00
0.75
0.92
Lindsell Train Japanese Equity
0.00
0.65
0.85
Miton European Opportunities
0.00
0.50
0.66
Vanguard US Equity Index
0.00
0.10
0.10
Baillie Gifford EM Leading Companies
0.00
0.72
0.77
Goldman Sachs India
0.00
0.85
0.99
Hermes GEM SMID
0.00
0.45
0.77
Invesco China
0.00
0.94
0.94
Schroder Asian Alpha
0.00
0.75
0.96
These are the funds in our standard portfolios at 3 April 2020. These will change periodically and have not all been held throughout the period covered by this document.
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Head office Ascot House, Epsom Avenue, Handforth, Wilmslow, Cheshire SK9 3DF
Chester office 19a Telford Court, Chester Gates Business Park, Chester CH1 6LT
Equilibrium Financial Planning LLP (OC316532) and Equilibrium Investment Management LLP (OC390700) are authorised and regulated by the Financial Conduct Authority and are entered on the financial services register under references 452261 and 776977 respectively. Registered Offices: Head office. Both companies are registered in England and Wales.
0161 486 2250 0808 168 0748 askus@equilibrium.co.uk www.equilibrium.co.uk